When you fall significantly behind on a government tax bill, whether that tax bill is attached to your company or personal taxes, Uncle Sam looks for other ways to collect. One method includes staking a claim in your business interests.
Not only can the government put a tax lien on the tangible assets of your business, like your building and inventory, but it may put a lien on your intellectual property and financial assets as well. That means that your patent and stocks cannot be sold without settling your tax bill first.
Want to sell your business or offload some of its assets? For anyone looking to buy, tax liens represent a major hiccup. But if you follow the proper steps, you can still sell your business successfully without placing a burden on the new owner.
What is a Tax Lien?
A lien is a process that gives another entity the right to take possession of something that belongs to you until your debt to them is paid. Contractors can put a lien on a home for an unpaid final invoice, and the federal government can put a lien on your business when you have failed to pay a tax bill.
How Tax Liens Affect Sale of Business Assets
A tax lien could put your business in a tricky financial situation or make it harder to sell. IRS will post a public “Notice of Federal Tax Lien,” so all of your creditors will know about it.
The good news is that since April 2018, the three major credit reporting agencies have agreed not to include federal tax liens on your personal credit report. While that is a bright spot in an otherwise dark time, don’t forget, you will still need to find a way to settle your tax bill, to ensure the government will not seize your business.
Can You Sell an Asset with an Attached Lien?
You can sell a property or other business asset with an attached lien as long as the government gets their fair share. In an ideal scenario, your business equity is more than what you owe to the government. In this scenario, you can fully satisfy the tax lien with profits from the sale and still have something left over for yourself.
For instance, say you owe a tax lien of $50,000. If you sell your business for $400,000, and spend $200,000 settling other debts, then you can pay off your tax lien and still have $150,000 left over.
In some cases, the sale of business assets does not necessarily have to fulfill the entire lien in order to be sold. IRS will release a lien to allow a sale as long as they get a portion of the remaining equity after senior debts (such as a mortgage), commissions, and other debt are paid.
If, for example, the federal government has a tax lien of $100,000 against your business; the sale price is $300,000; and the loans and debts senior to the federal tax lien are $200,000. After sale settlement costs and commissions of $25,000, only $75,000 remains.
Even though you owe $100,000, the government may allow the sale to go through and collect the available $75,000. Depending on the type of discharge you apply for and whether you are a sole proprietor, the government will either apply the remaining $25,000 lien to another asset or discharge the entire lien. Either way, the business is now free of the lien and can be sold free and clear to the new owner.
Tips for Dealing with IRS for Sale of Business Assets
Any sale of a business asset or property that has an attached lien will involve extensive communication with IRS. While there are many forms to fill out and submit, going through the process the right way will help relieve you of the lien sooner than later.
6 tips for navigating the sale of a business asset that has a federal tax lien:
- Assess the amount of the tax lien. If you are currently on an installment plan to pay off the tax debt and owe less than $25,000, IRS may agree to withdraw the lien altogether. Refer to this IRS Withdrawal Application, or speak with a professional tax attorney to determine whether you have a case to ask IRS to withdraw the lien.
- If you are not on an installment plan, set one up — and be consistent in your payments — in order to show your good faith in repaying the debt. Your good faith payments may help your case if and when you need to apply for discharge in order to sell your assets.
- Submit all required paperwork to IRS at least 45 days before the sale or settlement meeting of a property or business asset. Allowing the federal tax lien to linger unaddressed could ultimately delay a sale.
- Read IRS Publication 783 to see examples of different types of discharges. There are six unique provisions that may be available to you. Working with a legal tax expert will help you understand which types of discharge are best for your individual situation.
- Determine if your business sale will fully satisfy the tax debt. If not, you need to file Form 14135 with IRS to apply for a discharge (you can also find this form at the end of Publication 783).
- Consider filing for subordination. This allows other creditors to collect before IRS, and it may expedite a sale. An approved subordination signals to other creditors that they will not have to battle with IRS over who gets paid first. Use IRS Form 14134 to apply for subordination. An experienced tax attorney can help you file for subordination and make a case to IRS.
3 things NOT to Do When Selling or Buying Tax Liens
Knowing how to manage a tax lien is just as important as knowing how not to manage one. Making the wrong move could lead to complications and disrupt your sale. Here are some common mistakes to avoid.
- Never try to circumvent your tax lien. Some assume that a cash sale that never reports the lien means you will have money in your pocket before the government ever learns about the sale. This is highly risky. Your creditors are likely know about the lien and IRS will find out, they almost always do.
- Do not submit incomplete or inaccurate information to IRS. It may feel like the government is asking for your most personal information on some of the required forms, but it is better to fill out the form correctly the first time rather than submit guesses or leave fields blank. Doing so will only delay or even sabotage your sale. Submit legible copies of all documents requested.
- Be sure to submit information for anyone who is representing you. It is a good idea to have an experienced tax attorney represent you during a sale involving a federal tax lien. If you do choose to work with a tax attorney, submit IRS Power of Attorney Form 2848 with the required signatures so that your representative is able to support you in all matters related to the sale.
To help you navigate the legal process correctly, reach out to a tax attorney who understands tax liens, the various forms of discharge, and can identify which type of discharge (if any) you are eligible for. Milikowsky Tax Law was voted one of San Diego’s best tax attorneys and is considered among the top San Diego law firms by the San Diego Business Journal. Our experienced team is ready to provide you the advocacy you need to sell your business assets that are under a tax lien. Call us for a consultation today.
The information contained on our website and in blogs is provided for information purposes only and does not constitute legal advice.